monetary accommodation

Cheap Money

A monetary policy in which a central bank sets low interest rates so that credit is easily attainable. This makes borrowing easy for business, which stimulates investment and expansion of operations. The immediate result of cheap money is a boost in stockprices; in the medium term, cheap money promotes economic growth. However, if cheap money remains in the economy for too long, it can lead to a situation in which there is a glut of currency or too many dollars chasing too few goods and services leading to inflation. For this reason, most central banks alternate between policies of cheap money and tight money in varying degrees to encourage growth while keeping inflation under control.

monetary accommodation

the use of MONETARY POLICY to ‘accommodate’ sudden supply-side changes in the economy, for example, an increase in nominal money supply to offset the deflationary impact of an oil price or other major cost increase. In the absence of monetary accommodation, the COST-PUSH INFLATION associated with an increase in oil prices would act to reduce the real money supply, increase interest rates and cause AGGREGATE DEMAND to fall. To avoid such recessionary tendencies, the authorities need to increase the rate of monetary growth to restore lost purchasing power.

The policy challenge, he said, was to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation.

Work by Athanasios Orphanides and others has argued that the heavy reliance on mismeasured or misperceived output gaps was a significant contributor to the excessive monetary accommodation that led to the Great Inflation in the 1970s--not one of the Fed's finer moments (see Orphanides and Van Norden 2002).

Ultimately this monetary accommodation can be Self-defeating: The economy still must adjust to elevated commodity prices if commodities remain scarce, and it must confront a higher rate of inflation to boot.

Short-term interest rates in the US has remained at near-zero levels as the central bank continues a policy of monetary accommodation to steer the economy away from deflation and reduce unemployment levels.

The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke said in a keynote address at a seminar.

In its latest credit policy, the central bank has signalled "the first phase of exit from monetary accommodation with a 1 percentage point increase in the statutory liquidity ratio (SLR, a measure of mandatory bank investments in government bonds) to 25 per cent of a bank's deposits.

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